Private mortgages are loans made by businesses or individuals who are not traditionally mortgage lenders. If you are looking to ask for a loan or lending money for a home, private loans can work out great for you. But just like any other types of loans, things can go wrong financially.
Hard cash or private mortgage, which one is better?
Hard money lenders are more convenient for people who have a harder time getting approved for loans by traditional loan lenders. Hard money loans are often more expensive than other types of mortgages and they requires a low loan to value ratio.
Why should you go private?
It does not make sense when the world is full of other lenders. You could ask for the mortgage from large banks, online lenders and local credit unions why go for private lenders?
Here is why
Qualifications – most borrowers may not be able to qualify for a basic mortgage from larger banks and traditional lenders. They require a load or documentation and your finance has to be in line with the specifications of the bank.
Even when you qualify to make the loan repayments, the lenders will need to verify that you have specific criteria so you can complete the verification process. For instance, it is harder for self employed people to get loans from traditional lenders.
Keeping it in the family – it still counts as a private loan when it is kept between the family. It is a great financial decision for people who can manage this strategy. You can save on your cash by paying a lower interest rate or none for that matter and also prevent penalties and other kinds of fees imposed.
Understanding the risks of private mortgages
Any kind of loan can be a problem, even private loans. Even when you start out the private mortgage with good intentions, some issues can come up. They include
The relationships – having an existing relationship between you and the lender can make the entire process difficult. For instance, if you borrow some money from a family member and purchase the home at a loss you will feel the extra stress but you still have to pay back the money. The lender is faced with the difficult task of enforcing agreements on the loan to reduce legal complications.
The lender risk tolerance- the lender give you the loan with an expectation to get repaid within a specific period of time. Evaluating your ability to make the payments is much harder for private lenders.
The value of the property- real estate property is very expensive and fluctuations in property values can total up to 5 figures. Lenders need to be comfortable with the condition of the property to lend you the mortgage loan.
Tax complications – the tax laws become more complicated when you are dealing with private mortgages. Moving the large sums of money can create multiple issues, you need advice from the local tax financial advisor before your proceed.